Trump’s dream of cheap oil may come true
As winter keeps its grip on the northern hemisphere it is the oil bulls, not the bears, who have gone into hibernation. The price rally that greeted the new year has fizzled out as renewed concerns about demand growth outweigh the tightening of oil supply through Opec cuts and US sanctions.
Saudi Arabia had already started to deliver on its promised output reductions in December and went beyond what was pledged in January. US production growth has stalled — for now — and President Donald Trump’s sanctions on oil flows from a second Opec producer (Venezuela joins Iran on the naughty step) will cut supplies even further.
The flow of Opec crude to the US fell to the lowest in five years in January, according to data from the cargotracking and intelligence company Kpler. Bloomberg’s own tanker tracking shows the flow of crude from the Persian Gulf to the US last month was 36% lower than in December and almost 60% lower than in August.
Those flows matter, not because the Americans are Opec’s biggest customer — they aren’t — but because the US market is still the most transparent. Official weekly data on the country’s oil production, consumption, refining, stockpiles and trade flows are watched keenly by traders and policymakers. Those indicators drive sentiment.
The problem for bulls is that while oil supply has clearly tightened, demand is starting to look weaker again.
Hopes of a breakthrough in Us-china trade talks were knocked back after Trump said he wouldn’t meet President Xi Jinping before a March 1 deadline to avert higher tariffs on Chinese goods.
Meanwhile, the European Commission has slashed growth forecasts for the euro area’s big economies and warned that Brexit and the slowdown in China threaten to make things even worse. That might start to weigh on oil demand forecasts, which have remained relatively robust.
Last month, the International Energy Agency cited “average prices being below year-ago levels” as the main reason it saw demand growth holding up. We’ll have to wait for its next forecast on Wednesday. Oil prices have been flat for a month, but the weakening economy is negative.